By on May 29, 2012

Easy credit is coming back: U.S. lenders extended to car buyers some of the easiest credit terms since the financial crisis in the first quarter, credit research company Experian told Reuters.

People with subprime credit scores receive loans again, interest rates are down and there is  more time to repay.

Says Reuters:

“The relaxed terms make it easier for individuals to buy cars, which is good for car dealers, manufacturers and the economy. But more aggressive lending also increases the chances of another round of losses for banks if borrowers lose their jobs and cannot keep up their car payments.”

 

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25 Comments on “Got A Pulse? Buy A Car: Sub Prime Riding High Again...”


  • avatar
    Landcrusher

    I am not worried about the banks getting in trouble with this, it’s the manufacturers that concern me. Easy money distorts the true demand picture and leads to boom and bust doesn’t it?

    • 0 avatar
      aristurtle

      It leads to inflation, actually. Easy credit for car buyers results in de facto more money in the car-buying system which results in higher prices for cars. This is part of Steve Lang’s recent auction troubles. If people can spend more money on cars because of BHPH loans, the real price of a used car will go up, which naturally means that BHPH lots will be willing to spend more money at auction. Used car prices won’t collapse until the easy credit system does.

      • 0 avatar
        jmo

        No, the exact opposite will happen. As more people with poor credit can get new car loans they will do the logical thing and buy new vs. paying wildly inflated used car prices. As a result prices of new vs. used will stabilize.

  • avatar
    APaGttH

    Subprime never left TFS has been writing paper to 520 for almost two years now. Scion dealers publish the TFS rate sheet and update them daily on their websites:

    http://www.avondalescion.com/Finance-Rates.aspx

    Kind of eye opening. Toyota will gladly give you 100% financing at 20.70% for 60 months on the new Scion of your dreams with a FICO score of 520. Never mind the criminality of 20.70% interest. On the other hand if your FICO score is 720 and above, 3.25% for 60 months at 130% financing awaits. Wait 130%??? Why yes, now you can roll the sales tax and some TRD accessories into that purchase, or the balance on your upside down loan on your trade-in.

    If Toyota is doing this – I’m sure everyone is following. At least they are no longer writing paper for FICO scores below 520 (last month TFS was)

    • 0 avatar
      jmo

      “Never mind the criminality of 20.70% interest. ”

      Why is that criminal? With a FICO of 520 they have a documented history of not being able to meet their obligations.

      • 0 avatar
        99_XC600

        Yes, and that’s a huge red flag being planted into the buyers head that says. “You’re not ready to buy a new car….Think about what you’re doing.

      • 0 avatar
        icemilkcoffee

        Or a documented history of falling prey to predatory lending- for example, buying a depreciating asset with a 20% interest loan.

      • 0 avatar
        Landcrusher

        Actually, no. Fair Isaac won’t say that, and will argue with you if you do.

        Their scores are a secret and proprietary GUESS that proves nothing. Their income and ability to sleep at night depends on a bunch of semantic wiggles and giggles. Basically, they claim that a company that uses their scores will make more money than one that doesn’t. Any individual score can be misrepresentative and it’s up to the scored person to fix it even though they will only give general advice on how to do that. Advice that includes telling you to make foolish monetary decisions and pay extra for goods and services to their clients.

        The scoring practice should rightly be crushed under the weight of libel suits that they manage to avoid through lobbying and trickery.

      • 0 avatar
        jaje

        Ask Mitsubishi how that all worked out in the early 2000′s. Mitsubishi gave loans to people even the Big 3 turned down. Meanwhile they stuffed the fleet channels with ~ 50% of their deliveries.

      • 0 avatar
        APaGttH

        And here is exactly what is wrong with America today.

        There was a time when 20.70% interest was criminal – here was the better idea – you just didn’t qualify for the loan. That was back in the “bad old days” when interstate banking was just a budding idea and most states had clear usury laws and states like Connecticut had a maximum cap on interest at 15.4%

        Now places like Western Sky run ads for $10,000 loans at 89% interest and we just shrug and go, “borrowers fault.”

        Here is another idea – lets return the usury laws and just not offer subprime finance – affording credit to those that actually can — afford it.

        There is no value in providing loans down to this level if a majority of the borrowers are going to default. The last time I checked, the last time that happened it was the American tax payers that paid for the losses, the idiots at the banks who wrote the paper got big bonuses, and the government declared them “too big to fail.”

        Heck even TFS took money from the Fed connections during the meltdown and $2.1 billion in emergency loans from the Japanese government to keep their finance arm propped up during the meltdown. Toyota thanks the Japanese and American people.

      • 0 avatar
        jmo

        “There was a time when 20.70% interest was criminal”

        And there was a time when the rate on a standard 30 year fixed rate mortgage was 18.15%.

      • 0 avatar
        APaGttH

        …And there was a time when the rate on a standard 30 year fixed rate mortgage was 18.15%…

        Fed policy to try and control 70′s inflation versus the systematic destruction of usury laws so the banks could increase profits writing more subprime paper (which contributed in small part to the S&L collapse of the 1980s and certainly to the banking collapse of 2008) has about as much in common as a peach and rhubarb.

        And when those mortgage rates were 16% to 18% you could get 6% and 7% return on simple savings – assuring retirement simply by investing in stable, safe banking instruments. Oh how horrible those days were!!!

      • 0 avatar
        CJinSD

        How could you assure retirement by earning half of the inflation rate in interest? Or do you mean something else by assure?

      • 0 avatar
        jmo

        “And when those mortgage rates were 16% to 18% you could get 6% and 7% return on simple savings”

        And inflation was 10.35% so at 7% you were losing 3.35% of your money each year. The year before inflation was 13.58% so you were losing 6.58% of your money if you were getting 7% on your simple savings.

  • avatar
    Toad

    20.7% interest is not criminal if you have a 520 credit score; if you have a score that low you have stiffed a bunch of creditors. You have to make an effort to have a score that low. If your score is 720 or over you basically pay everybody on time, all the time. Not surprisingly the consequences of the two behaviors yield very different results.

    The 520 score tells creditors that they have a pretty good chance of getting many payments late or not at all, and they are going to have to make lots of collection calls and perhaps repo the car; all those efforts plus the implied risk cost money. I would not lend money to somebody with that kind of score under any circumstances; if a lender is willing to do so the interest rate understandably reflects the high risk.

    If pay your bills on time and in full you get to pay very low interest rates when you borrow money. Pay your bills late or not at all and you will find very few people want to do business with you at all, and those who do will make it expensive or even dangerous.

    • 0 avatar
      Landcrusher

      See above. You have Galen for their scam and believe what even they will not say to avoid libel.

      • 0 avatar
        Toad

        I have done F&I work and read many credit reports. Each creditor is listed along with the individuals payment history, including how many payments were 30, 60, 90 and 120 days late (or not made at all). These are not “wiggles and giggles,” they are generally a very accurate history on the behavior of the individuals payment history.

        As a rule, past economic behavior is an excellent indicator of future economic behavior. Credit scores reflect that. If you disagree feel free to loan all the money you can to people with bad credit and see how it works out. If you are right you might get rich. If you are wrong…you’ll probably ruin your credit score.

    • 0 avatar
      Landcrusher

      You make two separate and distinct statements that sound great, but are really veneers over irresponsibly bad behavior. By the way, I have trained F&I guys how to use their software and how to use it to improve profit as well as worked with dealers to improve their dealerships. I know what most of you know and much more about FICO.

      First, credit history is mostly straightforward except for how carelessly the removed items are allowed to creep back in. Not unexpectedly, the mistakes favor the bureaus, governments, and creditors who allow no recourse to the poor souls who get damaged by the mistakes. They value our time at zero while theirs seems to cost.

      The mistake you make in part one is assuming a known corollation between bad behavior and the score. Used to be, an early payoff resulted in the bank taking back their commission to the dealer. IOW, an early payoff is seen as bad behavior, and that sort of thing hurt a credit score. to non finance people (ie voters), early payment is GOOD behavior. There are all sorts of other “bad behaviors” that lower a score as far as anyone outside of FICO actually can tell, it’s all secret (IOW, wiggles and giggles). Examples include refusal to pay incorrect bills on demand, refusing to pay false debts, not borrowing like an addict, unemployment (even if you are wealthy), having adequate savings, paying credit on time, being wealthy, owning your home outright, self employment, paying cash, etc. All of those seem to lower your score!

      Your second half is precisely th semantic justification for the scoring. Note how you avoided saying good or bad economic behavior.

      • 0 avatar
        APaGttH

        Correct.

        There are plenty of “good” behaviors that can lower your score, and people make the mistake all the time.

        You should never close out old credit lines. One of the fastest ways to hurt your score. Never mind if reducing available credit and not paying unnecessary banking fees shows fiscal prudence, if your time you have credit declines along with your total available credit – your score goes down. No not 150 points, but 25 points can make the difference of a point or two on a mortgage or car payment and that adds up quickly.

        That is only one example of doing the “right” thing where your score is lower.

      • 0 avatar
        Toad

        “I know what most of you know and much more about FICO.” Not only smarter than I, but apparently psychic as well. I did not teach people how to use software, I actually did the F&I work. I met the customer, took the credit app, pulled the report, then tried to reconcile what the customer told me with what their credit report said. The credit report was more honest than the customer (initially) was 99 times out of 100. There is a reason vehicle dealers often say “buyers are liars;” credit reports bring a lot of clarity.

        Basically a lot of people will lie their ass off on a loan application hoping nobody will check their background. Reading the report tells you about late and missed payments, charge offs, and repo’s as well as debt to net ratios. We loaned (or did not loan) based only on those factors which the credit reports and FICO scores reflected fairly accurately.

        The key was always talking to the customer about the “issues” on their credit report because if it is not accurate it is fixable, and you can make a sale/deal. Unfortunately these conversations were usually fairly short because the multiple late payments, judgements, and other problems were accurate.

        I NEVER had a deal go south because of early loan payoff, false debts, having adequate savings, paying on time, being wealthy or owning your own home. However, paying all cash all the time makes you a “ghost” with no credit history (and thus a higher risk or possible illegal income that is subject to government seizure), and self employment without much history is risky.

        Finally, if I neglected to do so let me say it now: FICO scores tend to reflect good, bad, and in between economic behavior. People who behave badly tend to dislike accountability, and credit scoring holds people accountable.

      • 0 avatar
        Landcrusher

        I don’t have to be psychic to know what you know, I read your post. IOW, you opened your mouth and proved your foolishness. Furthermore, when we trained F&I guys to use our system, they didn’t have start off as F&I guys to finish as one. It did almost everything except the human element.

        Your perspective as an F&I guy is really warped. You also keep making the same mistake confusing the score with history (not psychic so I don’t know if you are doing it on purpose as a debate tactic).

        You now add institutional bias and wiggle words like “tend”. Lastly, I like how people who pay cash are now assumed to be crooks, and people who think the irresponsibly bad services used to pass judgement on people with a bias towards foolish compliance and reporting businesses simply hate accountability because they are irresponsible. Personally, I hold the services to a higher standard than the guy trying to negotiate a better loan rate with a hired gun. The services need integrity way beyond honesty, they know it, and they deny it. FICO hides behind a purposely wiggly mission statement.

        Yes, the reports are usually accurate, but that doesn’t necessarily reflect in the score. Also, a single mistake often makes a big difference, and bad actors on the biz side are rarely ignored and never punished.

        The scores are also intended to be used in a few ways, some at odds with one another, and are also used for othissue intended things. The score has all the bad sides of profiling without the racism (though I suspect it has that as well). The whole thing is applying sociology like its psychology.

        Lastly, having worked with so many F&I guys and dealers, I also know sellers are liars. Back in the day, we knew the bad dealers because they would purposely use TRU reports because they contained the most errors which they could use to raise the rate and pocket the difference (many admitted it and we played along protecting our own jobs). So yes, the buyers and sellers are all going to play games and negotiate. Don’t play football if you don’t like contact.

  • avatar
    lw

    The Reuters article could be more accurate. The resulting losses will be transferred to ATM users and if that fails, the US taxpayer.

    We’ve all learned that banks don’t lose money. Profits are privatized and losses are socialized. Good business plan if you can get it!

    • 0 avatar
      gslippy

      What burns me about this is the bipolar behavior of the government on this subject:

      a) It is politically expedient to decry ‘tight credit’, begging banks to loosen credit for [certain] consumers ‘to get this economy moving again’.

      b) It is politically expedient to pin high personal bankruptcy rates and ‘predatory lending practices’ on banks when derelict consumers default on their loans and/or have to pay high interest rates to get a loan.

      We can’t have it both ways, but America is becoming a culture of All Winners, No Losers because personal responsibility is being transferred to the nanny state and, ultimately, the Taxpayer. It’s no longer politically correct to tell someone they are not creditworthy.

  • avatar
    Robert Schwartz

    I don’t think there were many losses on car paper during the 2008 affair. And, given that used prices are very high, there won’t be many losses on the latest version. GMAC did go down, but they did the old fashioned way with house mortgages.

    • 0 avatar
      DubTee1480

      I’ve seen news stories stating that people have been paying their car notes and credit card bills over their mortgages. I can kind of rationalize the car note and to a lesser extent the credit card bills (groceries and gas??). The foreclosure process can be longer and more lengthy than repossessing a car. I even had a car salesman tell me that if you were trading a car in on another one that their F&I guy was more likely to pay more attention to the car payment history than the rest (though undoubtedly the rest was weighed in too).


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